Lots of Americans are saddling themselves with credit card debt. Forty-three percent of Americans say they've carried a balance for two or more years, according to a new survey by CreditCards.com, which calls the widespread prevalence of such debt striking. And 23% have been carrying a balance for five or more years.
[ibd-display-video id=2322782 width=50 float=left autostart=true]Debt like that is bad for your financial health, says Bill Van Sant, senior vice president and managing director at Univest Wealth Management in Souderton, Pa. Your bank is charging you interest on the balance. And that growing burden eats into the money you have available for anything from emergencies to worthwhile discretionary expenditures, Van Sant says. It can be like having a paycheck that keeps shrinking.
And if an expanding balance leads you into late payments or into using too much of your available credit, it can hurt your credit score . That can cost you a higher interest rate the next time to take out a loan or acquire a credit card. "It's a vicious circle," said Matt Schulz, senior industry analyst at CreditCards.com.
Still, there are steps you can take to avoid debt in the first place.
- Study your monthly card statement. That monthly message from your bank is not exactly scintillating reading on a par with, say, the latest "Jack Reacher" novel by Lee Child. So why bother reading it? "Seeing the interest rate you're paying can give you an incentive for avoiding debt or keeping it low," Schulz said.
That motivation is reinforced by reading the section of your statement that explains how much extra you will shell out if you stretch out paying off your balance over periods such as three and 10 years rather than paying the entire balance right away.
You'll also learn how fast debt that racks up interest can grow.
In addition, checking out "your monthly statement is one of the best ways for you to detect fraud," Schulz said.
IBD'S TAKE:Equifax , the credit reporting bureau whose recent breach has put as many as 143 million Americans in danger of becoming victims of credit fraud and other forms of identity theft, has triggered more consumer credit reporting related complaints to the Consumer Financial Protection Bureau than any other credit bureau, LendEDU.com reports.
- Make a budget. Why go to the trouble? There are two reasons. First, making a budget forces you to identify things you spend money on. "This shows you how much you're spending, on what and when," Schulz said. "You've got to know that in order to decide the best way to cut spending and avoid or reduce debt."
The second reason for creating a budget is that it lets you prioritize your spending. On the budget, you can mark expenditures as things you "need" or things you merely "want." Wants are the first things you can cut back on, Schulz says.
- Pay cash. Why does it matter whether you pay for goods and services in cash rather than electronically or with plastic? Schulz said. "Generally, people spend less when they pay with cash. Cash feels more 'real'."
A fourth step for avoiding debt or cutting it after you've incurred it is this:
- Own fewer cards. "People get lured into taking new cards by store offers of discounts and reward points," Van Sant said. "But that's a formula for debt trouble. It multiples your temptations to spend. It promotes unnecessary spending."
The antidote is to forego opening new cards. You should also close cards if you have more than two, Van Sant says.
But be careful. Closing cards can jack up your credit utilization rate. That's the ratio between your credit limit and the amount of credit you're already using. "Consumers with the highest scores have utilization below 10%," credit expert John Ulzheimer said. A high utilization rate makes credit scoring firms worry that you can't afford additional debt or are more likely to default on loans.
Still, you can get a good - but not excellent - score with a utilization rate up to 25%, if your other credit score traits are strong, says Paul Bennett, managing director of United Capital's Great Falls, Va., branch.
So, don't spend anywhere near your credit limit. And don't cancel any of your credit cards right before applying for a loan.
- Ask for a lower interest rate. You may not get it, but there's no harm in asking, and you certainly won't get it if you don't ask.
And your card company may grant your request. They make money by charging you interest. If a high interest rate drives you to transfer your balance to another card, your old card company loses your business.
- Pay more often. Say what? This may feel counterintuitive. After all, those pesky payments are the problem, aren't they? But one reason for doing it is precisely because it hurts, Van Sant says. It can encourage you to keep your balance low.
In addition, it speeds up the payoff process. And it makes your outstanding balance shrink faster. That whittles down your cost in interest. And it makes you feel more in control of your debt, making it more likely that you'll continue to pay down your balance rather than let the balance keep growing uncontrollably.
How To Remedy Debt
And what can you do to help yourself if you've already racked up debt? Again, experts advise consumers to consider steps that can trim your debt and even get rid of it entirely.
- Get a balance-transfer credit card. This can have several benefits.
First, the card that you shift your balance to may well charge a lower interest rate. The average annual percentage rate on a balance transfer card is 15.38%, according to CreditCards.com's weekly rate report. That's better than the 16.15% rate - a record high - that is the average for all new card offers, Schultz says.
Second, balance-transfer cards often provide grace periods during which they do not charge interest. Zero-percent introductory periods can be as long as 21 months, Schulz says. Interest-free periods of 15 to 18 months are more common. Be sure to pay off as much debt as possible in the interim.
- Create a payoff plan. Once you've drawn up a budget, figure out how much you can afford to pay off on your outstanding debt each month.
"Everyone has a different strategy, whether it's paying off the credit card with the smallest balance first because that's easiest, or paying off the balance on the card that charges you the most because that's the costliest," said David Hays, president of Comprehensive Financial Consultants, in Bloomington, Ind. "The point is to make a plan for paying off your debt and sticking to it."
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